If you've suffered a significant blow to your credit, like a foreclosure or bankruptcy, but are now financially back on your feet, it's probably time to think about rebuilding your credit. Some steps to improve your credit scores are relatively easy, like ensuring your credit reports don't contain inaccurate information. Others can be a bit more difficult and will take some time, such as not falling behind in your bills again.
Also, counterintuitively, getting new credit is one way to improve and repair your bad credit.
You might think that you must jump back into the credit market as soon as possible to reestablish good credit. But here are ten ways to improve your credit that don't involve applying for new loans or additional debt.
Add information demonstrating your financial stability, like your job and address, to your credit reports.
No matter what, you mustn't miss a bill payment. Otherwise, the creditor will report the late or missed payment to the credit reporting agencies, and your credit repair efforts will suffer a setback.
Paying your balance in full keeps your credit utilization ratio (the percentage of your total credit lines that you're currently using) low—the smaller, the better.
If you can't pay the balance in full, pay down your credit card debts strategically. Because credit scoring companies look at your debt ratio when calculating your scores, you can raise your scores by paying down cards with a higher utilization ratio.
Example. Say you have one card with a $6,000 credit limit and a $3,000 balance. Another card has an $11,000 limit, and you have a $1,100 balance on it. The first card has a 50% ratio, which is high and bad. The second has a 10% ratio, which is good. You can raise your scores by paying down the card with the higher ratio.
Generally, you shouldn't use more than 30% of the available credit on your credit cards. If you exceed that threshold, it can hurt your credit.
If you still have a credit card or a department store or gas card, use it and pay your bills on time and in full if possible.
If you're married, divorced, or separated, and most credit accounts are in your spouse's name, consider getting some in your name.
If the amount you owe is close to your credit limit, that's likely to harm your credit. So, you might want to ask for an increase in the credit limits on your existing credit cards.
Though, be careful with this tactic: If you've missed payments or if your scores are trending downward, the card issuer might think you're about to have a financial crisis and you're desperate to get more credit. As a result, the issuer might decrease your credit limits. Make sure your financial situation appears stable before asking for an increase.
Also, this tactic only works if you don't use the additional credit. (Having the higher limit helps keep your utilization ratio low.) So, don't use this approach if you have problems with overspending.
It's usually a bad idea to close older credit card accounts. You might think of this step as cleaning up your credit. But in the case of credit cards, it usually helps to hold on to older accounts for a long time, which gives you a more established credit history.
If your older card charges an annual fee, ask the issuer to switch to one that doesn't have a fee while keeping your history.
Once you're back on your feet financially and have taken the steps discussed above to improve your credit, it might be time to consider getting new credit. Here are some ways to get new credit if you're trying to fix bad credit.
One way to begin rebuilding credit is to get a credit card. When you make purchases, you essentially borrow money from the credit card company and pay interest on the amount until you pay it back. Unsecured credit cards are riskier for the credit card company because if you don't pay, the credit card company can't do anything other than sue you for the balance. If you file for bankruptcy, unsecured credit card debts typically are discharged (wiped out). It's relatively easy to get an unsecured credit card after completing a bankruptcy; many people are surprised to find their mailboxes flooded with offers.
Though, think about whether you need a new card. If you don't currently have a credit card, it might make sense to apply for one. But if you already have one or more credit cards, applying for an additional card won't help your credit scores, and it might lower them some. Here's why: Around 10% of your FICO credit score is based on new credit or new credit inquiries. Because taking out new credit or making a lot of credit inquiries might suggest that you're urgently seeking more credit, these actions negatively affect your credit score.
Also, another 15% of your FICO score is based on the length of your credit history. New credit accounts bring down the average length of your credit history.
If you decide it's worthwhile to get a new credit card, but can't qualify for a regular unsecured card, think about getting a secured card. With a secured credit card, you deposit a sum of money with a credit union or bank. You then get a credit card with a credit limit for a percentage of the amount you deposit—as low as 50% and as high as 120% (typically as a promotional incentive). People with bad or no credit will have an easier time getting a secured credit card because they're less risky for the bank. The main benefit is that payments are reported to the credit bureaus without requiring the cardholder to incur more debt.
It's a good idea to research secured credit card offers before choosing one. Not only will the interest charged be high, but you'll want to find out how much you'll be charged for processing and application fees, as well as annual fees. While these cards tend to be expensive, many can later be converted to a regular card.
One major downside of secured credit cards is that some creditors don't accept or give much weight to the credit history established with a secured credit card. Before you apply for a particular card, ask the card issuer if it reports to the three nationwide credit reporting agencies: Equifax, Experian, and TransUnion. If the issuer doesn't, you've lost the key benefit of having a secured card.
If you can't get a credit card or loan on your own, consider asking a friend or relative to cosign. If the primary debtor defaults, a cosigner promises to repay a loan or credit card charges.
Although creditors typically report both your name and the cosigner's name to credit reporting agencies, confirm in writing with the creditor that the account will be reported in your name.
A "credit-builder loan" is designed solely to help you build good credit. Some credit unions, community banks, and a few online lenders offer these types of loans.
You fill out an application, and after being approved for the loan, the borrowed money is deposited in a savings account or a CD and held as collateral. So, you don't get access to the money initially. The loan amount is typically small, around $500 to $3,000, and lasts 12, 18, or 24 months. You make monthly payments on the loan, and the lender reports those payments to the credit reporting bureaus. Once you pay off the loan, you may access the money in the account.
These loans are usually a win-win for the borrower and lender: you get better credit scores, and the lender doesn't have to shoulder much risk because it can simply reclaim the funds in the account if you default on the loan. But if you don't make the payment by the due date each month, the lender will report the late or missed payment to the credit reporting agencies, and your credit won't improve.
You'll want to make sure that the lender will report the account to the national credit reporting agencies. Otherwise, the account won't help you build your credit.
You might also consider applying for a low-interest personal loan from a bank or credit union (not a high-interest personal loan from an online lender). You might have to offer either to get a cosigner or to secure it against some collateral you own, but not your house.
Sometimes, local businesses will work with you to buy items on credit. You might be able to set up a payment plan with the store to purchase an item and then make all payments on time. Again, this will only help your credit if the business reports to the national credit reporting agencies.
When calculating credit scores, FICO and other scoring companies look for a healthy mix of different credit types, both revolving and installment accounts. So, if you have credit cards and a mortgage, you might consider getting a different kind of loan, like an auto loan. Your scores might go down at first, but if you make your payments on time, your scores will probably increase. If you're looking to improve your scores quickly, don't use this tactic—it's more of a long-term strategy.
And, of course, make sure you're financially ready before applying for any type of new credit.